What is an option fee in real estate terms?

An option fee in real estate terms refers to a non-refundable fee that a buyer pays to obtain the exclusive right to purchase a property within a specified period of time. This fee is part of the option agreement, which allows the buyer to "lock in" the purchase price and gives them the right, but not the obligation, to complete the purchase later.

The option fee compensates the seller for taking the property off the market and provides the buyer a level of security and opportunity to evaluate the property or arrange financing before making a final commitment to buy. Since it is a distinct feature of an option agreement, it is important to note that should the buyer decide not to proceed with the purchase, they forfeit this fee, reinforcing its non-refundable nature.

In contrast, a refundable deposit would imply that there is a means of returning that money back to the buyer, which is not the case with an option fee. A penalty fee for breaking a lease relates to rental agreements and does not apply to purchase options. Lastly, a closing fee is associated with the finalization of a property sale, which occurs after the option has been exercised and is distinct from the option fee itself.